Yes, It's Okay To Walk Away From Your Mortgage

As many Americans begin to realize that it will be years (if not decades) before their houses are worth what they owe on them, the idea of walking away from your mortgage is going mainstream.

Not surprisingly, the mortgage industry is doing everything it can to prevent this, including telling homeowners that they have a "moral obligation" to pay.

But do they?

Is it okay to walk away from your mortgage for no other reason than it doesn't make financial sense to keep throwing your hard-earned money away?

There's no universal answer here, but in most cases, the answer is "Yes."

Importantly, the reason is not that "Wall Street deserves it" or "We've got to teach the banks a lesson" or any of the other bogus "retribution" logic being thrown around. The reason is that you and your lender engaged in an arms-length transaction in which you balanced your competing interests and spelled out your agreement and obligations in a clear contract. And unless that contract states that you have a "moral obligation to pay," you don't.

Specifically, when you borrowed money to buy your house, the bank or mortgage-lender evaluated the risk of the transaction and concluded that the risk of your not paying was a risk worth taking. To protect its money, the lender also required that you pledge the house as collateral, and it required you to have some equity in the house as an additional cushion. In the event that you didn't pay, the lender retained the right to seize the house, sell it, and pay itself off before you got your equity. The lender loaned you the money because it concluded that this was a smart business decision.

You, meanwhile, also made a business decision. You decided to borrow money to buy your house even though it meant risking your equity, home, and credit rating.

And now it turns out that both of you made a bad decision.

Fortunately, you don't have to fight about what happens next. The contract spells everything out: If you stop paying, the lender gets the house. That's it. Unless the contract specifically differentiates between a failure to pay based on hardship (involuntary) and a failure to pay based on a collapse in the value of the house (voluntary), there's no difference. If you had a "moral obligation to pay," that would be spelled out in the contract.

Now, compare this to a situation in which you DO have a moral obligation to pay: When you borrow money from a friend at no interest, for example. THAT is a moral obligation to pay. In this case, your friend did not lend you money to make a profit. Your friend loaned you money as a favor--with no collateral or contract.

And here's another way of looking at it: If you have a "moral obligation" to pay your mortgage, doesn't the bank have a "moral obligation" to keep you in your house? After all, they loaned you the money to buy it, got your hopes up, moved your family, etc. (And, no, of course the bank doesn't have this moral obligation).

Just because you don't have a moral obligation to pay your mortgage, of course, doesn't mean it's smart or even the right thing to walk away. In fact, the best solution would likely be for you and your lender to compromise (mortgage modification). That's what companies often do. Also, abandoning your house can screw your neighbors. And you may live in in a state with "recourse" laws, in which your mortgage lender can go after other assets. Etc. You can learn more about that here >.

But don't let the mortgage industry guilt you into paying from some "moral obligation." You both made a business decision. It turned out to be a bad one. That's why you have a contract.